Digital business platforms, such as Apple App Store, Uber, and AirBnB, are
dramatically reducing search* and transaction costs. They are multi-sided
marketplaces in which two or more user groups benefit from finding each other
more easily, thus creating indirect network effects.
The term “platform”, in the meaning of a digital multi-sided market, was coined
by Rochet and Tirole in 2003. Platforms create value by acting as conduits
between two (or more) categories of consumers, who would have been unable
to connect or transact otherwise. The more consumers enter the platform, the
more value they capture as a result of the indirect network effects between the
user groups. These network effects reflect the exogenous interdependence of
demand between consumer groups and shape platform competition. The
network effects in such a platform form a self-reinforcing feedback loop, which
creates an advantage for early adopters. In addition, as these network effects
grow, they act like a barrier to entry for potential competitors, under certain
conditions, leading to a winner-take-all outcome.
Direct network effects
Direct network effects are positive feedback loops created within the same
market, meaning that the benefit of a technology to a user depends positively
on the number of users of this technology on the same side of the market. Indirect network effects are positive feedback loops created across the same market, meaning that the benefit of a technology to a user depends positively on the number of users of this technology on another side of the market.
Figure 1. A snapshot of direct and indirect network effect positive feedback loops both contributing to the installed base of iPhone in the competitive market.The app markets for Apple iOS and Google Android are examples of such
markets. In the case of smartphone app stores, the consumers know that they
can easily find apps for their smart devices from the store, while the app
developers know that the users will look for apps there.
System dynamics - a powerful method of modelling digital business platforms
System dynamics is a powerful method to gain useful insight into environments
of dynamic complexity and policy resistance. Adapted to the context of digital
business platforms, it may facilitate understanding of the role of incentives in
such marketplaces for increasing participation, platform sustainability, value
generation, and market growth. In the context of SOFIE, system dynamics can
be applied to study the growth and investigate the sustainability of SOFIE pilot
platforms via simulations.
* Search cost is part of the switching cost, which depicts a rational consumers willingness to work in continuing searching a better offering until marginal search cost exceeds the marginal benefit from the available alternatives.